Healthy portfolio gives BAE scope to swing deals

Record numbers of orders last year indicated a short supply of available aircraft as the world’s airlines began to recover from the global recession of the early 2000s. This was good news for those with used aircraft on their hands–at least until most demand had been met, at which point placing remaining capacity became a challenge.

For BAE Systems, whose only involvement with complete aircraft currently is placing regional airliners for which it has head-lease liability and managing and marketing other OEMs’ designs, the problem has been to husband its idle portfolio. Last month, its regional aircraft division (BAERA) had on hand more than 60 various models, a number likely to grow as aircraft, such as Avro RJ regional jets operated by THY Turkish Airlines, return from lease. Nevertheless, it expects to deliver 40 to 50 aircraft this year.

Having previously written off £1.25 billion ($2.3 billion) against BAE 146/Avro RJ liabilities, the company began 2006 facing “a tough market against other pre-owned aircraft, new entrants and our own products offered by other parties,” said managing director Alan Fraser. Its biggest challenge last year was to place “about 20” idle RJs and to expand its customer base, he said. Now, BAERA reports renewed activity, especially in aircraft trading.

Most recently, the company leased two 146-200s to new Serbian carrier Central European Aviation (Centavia), the second being delivered this month, with the airline expecting to require additional aircraft. Another recent delivery was an Avro RJ100 to FaroeJet, a new airline based in the Faroe Islands, located midway between Iceland and Norway.

BAERA’s “prospect tracking system” shows worldwide marketing activity, with more European business expected to absorb some of the fifteen 146s and 10 Avro RJs currently available. So far this year, the UK group’s leasing team has secured business with five new customers, including Centavia, FaroeJet and start-up turboprop operator MagicBird Airlines.

ATP Freighters

Having started this year “very confident” that it could place almost 30 Advanced Turboprops (ATPs) and Jetstream 41s, BAERA has instead seen the idle turboprop fleet grow by about 20 percent. New ATP Freighter (ATPF) customers have included Britain’s Atlantic Airlines and Dutch operator MagicBird Airlines, while Yeti Airlines of Nepal is a new J41 operator.

The three Atlantic Airlines ATPFs have large freight door modifications, while the two ATPFs leased to MagicBird are configured for E-class bulk cargo, the first aircraft having been delivered in April. MagicBird plans to operate up to eight ATPFs. Some 23 ATPFs have been contracted by, or delivered to, five operators.

Another new customer, India’s First Flight Couriers, has received the first of three ATPFs. Here at the Farnborough airshow BAERA is expected to announce deals covering two ATPs and three ATPFs, including placement of stored ex-Air Europa and British Airways Regional aircraft.

Yeti’s first two leased J41s have been delivered to Kathmandu from storage in Canada, with the two more set to follow to replace three Saab 340Bs. BAERA has leased two J41s to the UK’s Eastern Airways, bringing its fleet–the world’s largest–to 21.

By the end of 2008, the company aims to clear the some 80 smaller J32s on hand. Last year, BAERA exceeded its business plan by selling or leasing 42 J32s. Recent new business includes three J32s sold to Channel Isles operator Rockhopper and one leased to Servicios Aereos Professionales in the Dominican Republic.

BAERA is seeing increased activity by its Aircraft Trading and Management Services arm, which offers remarketing, lease management, asset administration and advice to third-party owners and lessors. In April, the division announced the sale of two Airbus A319s on behalf of Magritte Aircraft Leasing and European banks and investors to an affiliate of Air Castle Investment.

Last month, Wells Fargo Bank Northwest and other major banks mandated BAERA to place eight Bombardier Canadair CRJ200 regional jets previously on lease to Mesa Airlines in the U.S. It manages almost 80 aircraft and has dealt in the Airbus A320 series, A300-600s, A330s and A340s, Avro RJs and Boeing 737s, 757s and 777s.

BAERA has converted “about half” of the nine Eurowings and Air Dolomiti BAe 146s for which it is providing liquid-crystal display flight deck upgrades. It is understood to be negotiating with two operators to upgrade up to 20 more aircraft.

Meanwhile, the company continues to develop a dedicated freighter variant, the 146F, which it had hoped to launch in the first quarter of this year. It reports market requirements for a 146-200/300-sized aircraft “within 18 months or so,” which means that once launched, the 146F would need accelerated development.

Having identified three possible conversion centers, BAERA is in detailed discussions with one for an initial batch of ten 146Fs. The company previously proposed a program with Pemco Aerospace to install an upward-opening large freight door, but the U.S. modification center is now fully occupied with 737 conversions.